The art of selling Discounts

The art of selling Discounts

When I walked into my gymnasium (gym) during my routine workout timing, I was baffled to see a number of people waiting in a queue for their turn to hit the cardio-machines. This was the first time, in the 15 months of my membership in the gym that I had to wait for my turn. I realised then that a good number of faces were new which made me wonder if June was some auspicious month to start an exercise regime! And interestingly, the profile of the gym users was slightly different too – most of them were in the age group of 18 to 25 years from what used to be 25 years and above. As a regular gym goer, I was intrigued by this sudden change in the profile of my co-exercisers.

“Though e-commerce in India is still in a very nascent stage – save for the travel segment, I believe that with the exponential growth of smart phones, 3G and 4G, India is at the cusp of an e-commerce explosion.”

Well, before I lead you on, this story is not about the business of fitness or gyms in the country. This story is about understanding how the gym managed a sudden spurt in its membership without any offline promotional activities. And my question was answered by the gym instructor who said that they had sold memberships for a day through a popular group buying website. That explains two things: one, the sudden rise in membership in the month of June, and two, the change in the profile of my co-exercisers (those who have grown up with the Internet). This story is to understand the group buying landscape in India, the changing dynamics of the consumer profile and what it takes to succeed in this space.

Understanding the ecosystem

While low Internet penetration and the lack of consumer comfort with transacting on the Internet (both very critical for group buying businesses) were two major hurdles for e-commerce growth in the past, things have changed over the last two to three years. Internet penetration has improved significantly, particularly with mobile usage. “Though e-commerce in India is still in a very nascent stage – save for the travel segment, I believe that with the exponential growth of smart phones, 3G and 4G, India is at the cusp of an e-commerce explosion,” says John Kuruvilla, founder-chief executive officer, Taggle, a group buying website.

While using credit cards online is still a challenge, e-commerce players have so far circumvented this by coming up with different payment options for the customer.  But, Devangshu Dutta, chief-executive, Third Eyesight, a consulting firm focussed on the retail and consumer products sector, says, “We are approaching a tipping point, with more widespread availability of credit cards among younger users, who have grown up with the Internet during the last decade.” This makes spending on the Internet an option that’s waiting to take off.

The gradual rise in investments by the venture capital industry into the e-commerce space in the last three years is a reflection of this change. According to Venture Intelligence, a company that provides information and analysis on private equity, venture capital and mergers and acquisitions in India, the investments in this space have increased from US $33 million in 2009 to US $83 million currently.

Group buying or the discount deals business, a model popular in the U.S., adds a whole new dimension to the e-commerce industry. Put it simply, the sector gives offline retailers the opportunity to drive traffic into their stores through the online medium. Some experts even use the term offline-online commerce to describe the sector. This space has also grabbed the attention of the venture capital industry. Battery Ventures and Greylock Partners invested US $8.75 million in Bengaluru-based Taggle in June 2010 and Nexus Ventures and Indo US Ventures invested around US $12 million in January 2011 in New Delhi-based Jasper Infotech, the parent of Snapdeal.com.

The macro picture

In 2010, group buying saw phenomenal success with Groupon in the U.S. In fact, last August, Forbes magazine crowned Groupon the ‘fastest growing company ever’. It says Groupon made US $713 million in revenue in 2010, up from US $30 million in 2009. As of March 31 this year, its subscriber base was 83.1 million, up from 1.8 million at the end of 2009.

In the U.S., the retail industry is mature and there is already familiarity with the couponing system. While India is yet to get there in both these areas, there is no argument over the business potential in this space with over 20 million active Internet users (of a total of 90 million Internet users) in the country with an increasing number of them shopping online. It has already attracted entrepreneurial interest in India with several group buying sites, such as Snapdeal, Taggle, Dealivore, Dealsandyou and Vamoosevacations.com coming up in the last two years. Apart from products and services, many of these sites offer discounted deals in their city’s spas, gymnasiums, dance classes, car service centers and restaurants.

The whole model of offline – online discount coupons is based on a simple fact that everyone loves to strike a deal, to make a bargain and avail discounts. But, like Kuruvilla shares, there is no clear road map or trends on what works and what does not in a very nascent e-commerce space in India. And this means that you need to constantly try new things and continue experimenting with novel ideas to arrive at a working formula. He thinks a working model will evolve over the next 12-18 months with consumers getting hooked to buying great value online.

“But what’s happening in India is not a Groupon business clone,” clarifies Vani Kola, managing director, IndoUS Venture Partners.  The business model has been adapted to suit the changing demography of the Indian consumer and the orientation and exposure of the Indian merchant to the digital world.

Success definers

Companies need to differentiate themselves from their competitors. It could be based on the target audience, types of deals, brand positioning, the sectors they target and so on. The idea is to recognise and capitalise on one’s strengths and leverage on the scope of e-commerce growth in India. Taggle, for instance, felt that everyone was playing with bottom of the pyramid deals. So, it strategised to start at the top. “The move was a necessity given that by June 2010 many other group buying sites were already very much around, and it was important to get noticed quickly,” says Kuruvilla.

Today, a merchant is willing to use the Internet as a channel for customer acquisition if he is convinced that there is long-term value to his business. Kunal Bahl, founder and chief-executive, Snapdeal.com says, “We realised that small business owners, who now say that the Internet works for them as a channel for customer acquisition, will change the landscape of local merchant e-commerce in India.” And to pull a merchant to the site, it’s important to create a strong merchant service model.

Companies should have a robust backend process to ensure that the merchant keeps his promise to the customer. “The consumer experience for the product or the service that he avails from the merchant listed in the group buying site should be good, else he is not going to trust the site,” shares Kola. At the same time, the sites should be aware of merchant problems and meet his expectations by coming up with the right deals for him. Ultimately, the merchant wants the consumer to experience his products or service so that he can gain repeat customers.

The ability to understand consumer needs and create offers for him is another key success factor. The offers from the merchants and sites should be based on who is using the Internet today, since they are not meeting the consumer offline. Clearly, they have to make it appeal to a wide section of users. For instance, Taggle, to cater to those looking for unusual experiences, made available helicopter rides and vacation packages. Last September, it also featured a scuba diving course.

“This business is less about selling and more about building relationships that result in a win-win situation for our partners and us.”

How one manages to drive traffic to their site and, more importantly, monetise the traffic is a critical success factor. And right promotion and marketing activities play a significant role in reaching the audience. “For group buying sites, social media is an important enabler for developing critical mass for offers,” adds Dutta. Vamoosevacations.com, a group-buying site exclusively for travel, uses social media extensively. “Our marketing is done only online. We do e-mail marketing to existing as well as new subscribers,” adds Hari Swaminathan, co-founder-chief-executive officer, Vamoosevacations.com. Snapdeal’s marketing mix comprises of both online and offline channels.

Consumer’s delight

In the past five years, a new category of Indian consumers has evolved which is both brand and value conscious. These used to be two distinct segments earlier. “As a good portion of this segment is not season-conscious, there lies an opportunity for brands to liquidate excess inventory without taking a huge hit on long term brand value,” says Kuruvilla.

It is also a challenge for brands to offer a regular price and a discounted price often, and at the same time to sustain brand value over the long run. But Kuruvilla says, “If carefully executed, group buying sites do offer an upside even for brands (through yearly or rare clearance) and of course, for local merchants who do not have the wherewithal to target Internet or mobile savvy customers with ease.”

Besides this, the consumer always wants to see something new and exciting. “Young people today want to experience different services and discover new places,” says Kola. While this is a business opportunity for group buying sites, it also calls for a highly dynamic marketing team to be able to spot the newness and convince the merchant to strike a deal.

Money matters

There is potential for the top line to grow, which is already evident from the numbers of some of the companies. Snapdeal for instance, is all set to hit the Rs.100 crore revenue mark when they close this fiscal, which is only their second year of operation.

However, the cost structure for these companies is also heavy, similar to how it is at Groupon. Forbes magazine reports that the company is yet to make profit and is not likely to do so in the near future. Groupon had a net loss of US $ 390 million in 2010 and its operating expenses may increase if it’s planning to expand its subscriber base, sales force and marketing channels.

Talking about the Indian market, Kola adds, “Most of these companies are very young and they are not profitable right now.” With a number of players with similar offers, the major challenge for any site currently is to be able to have a strong brand recall and to build a critical mass of users. Dutta explains, “We see enormous amount of money being spent on generating visibility and usage and the number of transactions is very small currently, so profitability is far in the future for all the players in this space.”

However, an investment to grow in this market should happen before a company gets profitable. “When the first store commences it takes two to three years before it becomes profitable, like it happened for Dominos Pizza (master franchise Jubilant Foodworks) when they entered India first,” says Kola. Any e-commerce venture will have a cost of acquiring a customer. But Kola adds, “Customer-acquisition cost in the digital world or a group buying site is much lesser than what it is in the physical world. If one looks purely at cost of customer acquisition, it will be 30 per cent to 40 per cent of the customer-spend.”

Companies are betting on long-term growth, which is dependent on the overall dynamics of the country and its population that will spend on the Internet. Going forward, these costs will be justified based on the volume of transactions. “But, say after three years, there is no reason for them to not to have a 20 per cent to 30 per cent gross profit,” says Kola.

Not without challenges

Hiring the right talent is one of the biggest challenges for a startup in this space, especially in sales and marketing. Taggle looks for people with an ability and track record to sell new concepts. “This business is less about selling and more about building relationships that result in a win-win situation for our partners and us,” shares Kuruvilla.

“We didn’t have good talent for technology when we started and that proved to be a big challenge given we were building an e-commerce platform,” recalls Bahl. He adds, “Hiring sales personnel used to be a challenge when we started. Now we have a strong sales team and we recruit through internal referrals.” It currently has a team of over 400 professionals across the country, which is expected to grow to 700 by the end of the year.

The sector is expected to mature very quickly. This, according to Kola, is also a challenge, as the companies have to keep up with scale, expand the business and enter more cities and towns.  “For Snapdeal, it is a combination of on-ground partnerships with the merchants and the brands, coupled with smart innovations on the platform which will help in achieving scale,” adds Bahl. Companies can achieve scale by ensuring a large percentage of their subscriber-base transacts more than once, on an ongoing basis, says Kuruvilla.

While there is still skepticism towards using credit cards online, companies in India have been innovative by introducing other methods of payment like cash-on-delivery, something that is not prevalent in other countries. For those who aren’t comfortable making Internet transactions, Taggle has introduced the ‘buy-on-phone’ concept. People can call the customer care number and share their credit card details. This apart, net banking is gaining popularity in India.

Going forward

If industry estimates and expert views are anything to go by, this sector is likely to grow phenomenally in the next five years. For the fiscal 2012, the market size of this sector is expected to be approximately Rs. 400 crore in India and is likely to be more than Rs. 4,000 crore after five years, says Kola. But, for now, it is time for consolidation. “This will partially be driven by acquisitions among competitors, to buy out the acquiree’s customer-base. But it will also happen due to the failure and eventual shutting down of some sites that will run out of money,” says Dutta. In fact, Snapdeal acquired Bengaluru-based group buying startup Grabbon in the second half of 2010. “After meeting the Grabbon team, we found that they were a brilliant bunch, who were more interested in building something great rather than just owning everything,” says Bahl.

At a broad level, one or two companies in India will become phenomenally successful. And Kola adds, “They will create new Internet users. It will be difficult for more than two or three players to succeed in this space.” For this, it is important to understand the equation between the consumer and the merchant and be present everywhere. Given the rate of Internet penetration, the number of credit card holders and the increasing number of online customers, the potential that this sector holds is high. One just needs to get the strategies right: engage one’s customer, continue to innovate and build a brand that both consumers and merchants can trust. It surely is a business of discounts, but not at a discount!


New city rollout strategy

Entering a new city is a very important scaling up strategy. And Taggle’s John Kuruvilla shares what they do before they enter a new city. “There is a lot of planning that goes in before we enter a new city. For example, mapping the local businesses and categorising them on the basis of their ratings on review sites are some of the strategies we work on. Once we understand the potential from a supply perspective, we recruit a person locally with prior retail experience. We simultaneously start a customer acquisition program so that when we launch we have both supply and a large prospective customer base. It is a two to three month planning process before the actual launch. Launching products is easier but the customer acquisition process in a city remains the same.”

Snapdeal’s Kunal Bahl says, “We enter new cities based on its retail penetration. If there is a strong market potential, then we step in there. It takes us about three weeks to enter a city, of course a lot of work happens concurrently. We also build a pipeline of merchants before we enter the city.”


At Random

Online Products Business Vs. Online Coupons Business

E-tailing or online retailing competes with traditional brick and mortar retail stores and is expected to give them a run for their money. Will group buying sites turn out to be direct competition to these online retailers like Flipkart (an online bookstore), Infibeam (books, consumer electronics etc.) and Myntra (apparel, footwear and accessories)? Devangshu Dutta says, “Obviously any competition that takes a share of the wallet away is a threat. But, we have to keep two positive factors in mind: first, the overall e-commerce pie is growing rapidly due to multiple enablers and second, customers shopping on a group buying site have a different mindset than an e-commerce site that is not driven by deals. For instance, if you are looking for a specific book, or even browsing for a series of books, you’re more likely to be on a site that has an authoritative collection rather than the best ‘deal of the day’.”


Snap for a Deal

Snapdeal.com was incorporated in February 2010 by Jasper Infotech, a marketing solutions and services company. “Our conviction was very strong about the fact that with increasing disposable income in India, rising Internet penetration and willingness for a retailer to use the Internet as a channel for customer acquisition, there was a very large addressable market for a service like Snapdeal,” says Kunal Bahl, CEO. And as a proof of its conviction, in May this year it sold 30,000 deals in a day for a mobile recharge offer at 50 per cent discount.

The company offers anywhere from 50 per cent – 90 per cent discount on various products and services. “Merchants consider this to be an alternate risk-free marketing investment. They are investing in prospective customers and hence they pass on the customer acquisition cost as an attractive discount,” says Bahl.

Snapdeal has featured over 10,000 retailers in its site and around 65 per cent to 70 per cent of them want to get featured again. The company charges around 25 per cent to 35 per cent of the deal value as its marketing fee. It has users from across the country and gets anywhere from 1.5 million – 2 million unique visitors on the site daily, and sells thousands of coupons in each city, every day.

Snapdeal made a few innovations within this space like excluding requirement of minimum number of buyers, option pricing model (where the customer has the option of making an upfront payment or making a token payment and paying the rest to the merchant when he buys the product or avails the service) and has entered new categories (products and travel) to ensure that it meets the needs of the Indian customer. “We eliminated the concept of minimum number of buyers since we were confident of the number of customers that would go to the merchant location because of us,” shares Bahl. The value proposition for the merchant remains the same, irrespective of one customer or hundred customers. “Merchants try to acquire a new customer or sell distress inventory. In both the cases, they get to benefit from every single sale,” adds Bahl.

In January this year, SnapDeal raised US $ 12 million from Nexus Venture Partners and Indo US Venture Partners as part of second round funding. “The funds are being used to propel our expansion plans and beef up our resources to sustain the growth that we have been achieving month-on-month,” says Bahl. Snapdeal plans to scale its business to make it a billion dollar company in the next five to 10 years. It plans to extend its footprint to 100 cities from 50 cities currently by the end of 2011. “The strategy is to continue focusing on the customers’ needs and to ensure that we remain aggressive in pursuing our targets,” concludes Bahl.


Vamoose yourself

Vamoosevacations.com, founded in January 2011 by TravelMartIndia.com, is a travel, leisure and vacation group buying portal. It aims to increase travel and leisure activities among all market segments across India and believes in making things simple for its users. “The minimum number of buyers, tipping point etc. were too confusing so we have done away with those features. Even if one customer buys a deal, the deal is on,” says co-founder-chief-executive officer, Hari Swaminathan.

With a mission statement ‘Your dream vacations have just become affordable’, Vamoose offers discounts that range from 20 per cent to 65 per cent. But besides price, it creates unique vacation experiences that are customised on an individual basis. Travel is a difficult domain and any number of things can go wrong during a vacation or customers may require many changes in their plans. “It is critical that our back office can step in at the right time and provide solutions or customisation of vacation packages to our customers,” says Swaminathan.

Its early adopters have been those who are comfortable buying travel on the web. Its target customers include college students to those in their mid-50s. For customers, the value proposition is very clear – great deals.

The company is based only out of Mumbai and will probably remain that way for the near to medium term. It has over 1,25,000 subscribers currently and has sold about 100 packages so far. It helps merchants whose inventories are hard to sell. “Their inventory is perishable so instead of wasting it, they would much rather have some revenues,” adds Swaminathan.